Abstract
This 2015 Article IV Consultation highlights that the oil price shock is adversely impacting the economy of Angola. While oil production has recovered following the completion of maintenance work, non-oil GDP growth is expected to decelerate to 2.1 percent in 2015. The economic situation in 2016 is likely to remain challenging as international oil prices are not expected to recover and risks are on the downside. Growth is projected to remain stable at 3.5 percent in 2016, with the oil sector growing by about 4 percent. The non-oil sector is expected to show a small improvement.
1. Introduction
Angola has witnessed substantial improvement in socio economic conditions over the past five years, in spite of the heightening in downside risks arising from commodity price shocks, the weaker global demand for commodity exports, and tightening financing conditions. Like most resource rich nations, Angola’s long-term challenge is to seize the opportunity from oil resources to build up its productive capacity, strengthen institutions and promote human capital development. In this regard, the authorities are committed to step up their efforts to advance the implementation of the reform agenda aimed at fostering economic transformation and diversification, building economic resilience and strengthening policy institutions.
The authorities are appreciative of the Fund’s continued engagement and policy support, and value the candid discussions and exchange of views during the 2015 Article IV consultation mission.
2. Recent Economic Developments
The Angolan economy remains highly dependent on the oil sector. During the last five years, oil production accounted, on average, roughly 50 percent of GDP, about 90 percent of export earnings and nearly 75 percent of fiscal revenues. Given the economy’s vulnerability to commodity price swings, upgrading economic competitiveness in non-oil sector, particularly in agriculture and manufacturing, remain the main challenge to build economic resilience in the medium and long-term.
The decline in the oil prices over the past several months triggered the growth slowdown and led to a decline in sources of foreign exchange. The growth projections for 2015 have been revised downward to 3.5 percent, from initial forecast of 4.5 percent. Growth in the oil-sector is expected to reach 6.8 percent in 2015 following the completion of maintenance work of oil fields, a significant recovery from a decline of 2.6 percent in 2014. Nonetheless, growth in the non-oil sector is projected to decelerate to 2.1 percent in 2015, from 8.2 percent in 2014. In the near term, increasing fiscal space for transformative infrastructure projects and lifting up the efficiency of capital spending are paramount to accelerate the pace of economic recovery.
The average inflation is projected to reach 14 percent in 2015, exceeding the Banco Nacional de Angola (BNA) target of 7-9 percent. Inflation pressures reflect partly the impact of depreciation pass through on domestic prices given the Angola’s heavily reliance on imports, which represent about 21.0 percent of GDP. In light of increasing depreciation pressures, the BNA has raised its policy rate to 10.5 percent in October 2015, from 8.75 percent in September 2014. This adjustment in the monetary policy stance is a decisive step to mop up the excess liquidity in the banking system. Furthermore, to gradually realign the exchange rate towards its equilibrium level, the BNA is drawing down international reserves and allowing further exchange rate flexibility.
The fiscal stance has been tightened to shield the economy against short-term vulnerabilities arising from commodity price volatility. The National Assembly approved in March of this year, the 2015 revised budget which envisage an overall fiscal deficit of 7.0 percent of GDP. Assuming a conservative oil price of US$ 40 per barrel, the fiscal stance was calibrated to lessen the impact of fiscal risks due to significant losses in oil-revenues. Specifically, the total revenue was revised downward to 23.4 percent of GDP in the revised budget, less 8.4 percentage points relative to the initial budget. Similarly, the oil revenue was adjusted from 18.9 to 9.0 percent of GDP, despite the slight increase in the non-oil revenue from to 10.5 to 12.5 of GDP. The fiscal adjustment made in 2015 resulted in considerable cuts in capital expenditure, reaching 5.5 percent of GDP, from 10.1 percent of GDP in the initial budget. By the same token, current expenditure was revised downward to 24.9 percent, from 28.5 percent of GDP in the initial budget.
The current account deficit is projected to widen to 7.6 of GDP in 2015, from 1.5 percent of GDP in 2014. This is mostly explained by a decline in exports of oil and gas products, which is projected to reach 34.7 percent of GDP by end-2015, less 10 percentage points relative to 2014. In light of this, the gross international reserves are projected to decline to US$ 20.0 billion in 2015, equivalent to 6 months of import cover, from 27.7 million in 2014 (8.1 months of import cover).
3. Medium Term Outlook and Policy Priorities
The medium term economic outlook remains benign although the balance of risks is tilted to downside. These risks include persistent negative oil price shocks, coupled with slower growth in emerging markets, which accounts for significant share of Angola’s main exports. Growth is projected to remain at 3.5 percent in 2016, with the oil sector growing by 3.9 percent, a slight decline from 6.8 percent expected for 2015. Growth in the non-oil sector is projected to accelerate from 2.1 percent in 2015 to 3.4 percent in 2016, and to reach 4.2 percent over the period 2017-2018, driven mostly by a strong recovery in agriculture, and improved supply of infrastructure. Average inflation is forecast at 14.2 percent in 2016, given the gradual pass-through of depreciation pressures into domestic prices. Inflation expectations are expected to remain contained in subsequent years in response to tightening in monetary policy.
Fiscal Policy
The medium-term fiscal strategy envisages achieving fiscal consolidation while deepening the implementation of fiscal structural reforms aimed to broaden the tax base, diversify the sources of revenues and improve public spending efficiency. Total revenue is projected at 27.6 percent of GDP in 2016, of which oil revenue will account for 15.6 percent of GDP and non-oil revenues for 10.1 percent of GDP. Public spending is expected to remain on average at 29 percent of GDP in 2016 whilst the overall fiscal deficit is expected to improve to 1.4 percent of GDP in 2016, from 3.5 percent of GDP in 2015, mostly reflecting the scaling back of capital spending and containment on recurrent spending, particularly wage bill and goods and services.
Going forward, the authorities remain committed to invigorating the implementation of ongoing measures to diversify the sources of non-oil revenues, and accelerate the pace preparation towards the introduction of VAT. In addition, to foster fiscal consolidation and maintain a sustainable debt path in short and medium-term, they will step up efforts for swift implementation of measures aimed to streamline public expenditure; enhance the institutional capacity on investment planning, implementation and monitoring; strengthen the financial oversight of state owned enterprises; and improve the medium-term fiscal framework and adoption of fiscal.
Monetary and Exchange Rate Policy
The monetary and exchange rate policy stance in the medium-term seeks to anchor inflation expectations and smoothen exchange rate volatility. Average inflation is projected to reach 14.2 percent in 2016, and to decline gradually to 11.4 percent in 2018, reflecting a gradual tightening in monetary policy. In the medium term, the BNA will continue to fine tune its policy instruments to anchor inflation expectations on the one hand, and allowing exchange rate flexibility to prevent further losses in international reserves, on the other hand. Furthermore, the BNA will continue to enhance its institutional capacity to improve the effectiveness in conducting the monetary policy through stepped up efforts to improve inflation forecasting and liquidity management tools with the Fund support.
Financial Sector Policy
Building a robust financial system and fostering financial deepening and inclusion are critical to support ongoing efforts to accelerate economic diversification and transformation. Additional steps have been taken to reinvigorate the implementation of the 2012 Financial Sector Assessment Program (FSAP), with the approval of Financial Institutions Law, which requires the creation of a Deposit Guarantee Fund and the Bank Resolution Fund. Furthermore, with the aim of upgrading the capital markets the authorities have recently launched the Angola’s Securities Exchange.
In light of potential systemic risks stemming from an increasing share of non-performing loans (NPL) and the falling of the capital adequacy ratios in the banking system, the BNA will speed up the implementation of the Financial Institutions Law, and policy measures aimed at strengthening macro-prudential regulations and the financial oversight on the banking system. Furthermore, priority has been given to strengthen the implementation of AML/CFT framework, through the development of institutional capacity for effective implementation of the Law on Criminalization of Money Laundering Predicate Offences.
Structural Policies
Fostering the pace of economic diversification and transformation remain the main objective of the National Development Plan (2013-2017). In this regard, the authorities will continue to increase the fiscal space for transformative infrastructure projects in energy, transport and communications, agriculture and manufacturing sectors, and for human capital development.
Measures have also been taken to gradually remove economic bottlenecks, improve the business climate, ease bureaucracy and streamlining investment incentives, and create flexibility in labor market, through the enactment of a number of Laws, including: (i) the Simplified Companies Incorporation Law; (ii) the Private Investment Law; and (iii) the General Labor Law. The Electricity Law is currently under review to address efficiency constrains and opens the sector to private sector participation in generation and distribution of electricity.
Creating incentives to unlock the country’s economic opportunities and promote the development of small and medium size enterprises (SMEs) is one of the cornerstones of Angola’s diversification strategy. To achieve this desideratum, the authorities will invigorate the implementation of measures to facilitate SMEs’ access to credit through the Venture Public Capital Fund, revamping implementation of ongoing measures to simplify the process for starting small business and simplify the structure of incentives in order to accelerate import-substitution.
4. Concluding Remarks
The Angolan authorities have made commendable efforts to mitigate the short-term vulnerabilities arising from cyclical shocks while creating the necessary conditions to gradually address the structural constrains to economic competitiveness. Going forward, the authorities would like to reassure the Board of their commitment to advance their structural reform agenda to foster economic transformation and diversification. Challenges remain, particularly related to downside risks induced by commodity price and terms of trade shocks and the weaker global demand. In light of this, policy priorities will be focused on gradually removing the bottlenecks to economic competitiveness and productivity.